Question:
ABC corporation is determining whether to support $125,000 of its permanent current assets with a bank note or short-term bond. The firms bank offers a two-year note where the firm will receive $125,000 and repay $150,000 at the end of two years. The firm has the option to renew the loan at market rates. Alternatively, ABC can sell 9.5 percent coupon bonds with a 2-year maturity and $1,000 par value at a price of $950. How many percentage points lower is the interest rate on the less expensive debt instrument?